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Edited Transcript of XRAY earnings conference call or presentation 2-Aug-19 12:30pm GMT

Q2 2019 Dentsply Sirona Inc Earnings Call

YORK Aug 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Dentsply Sirona Inc earnings conference call or presentation Friday, August 2, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Donald M. Casey

DENTSPLY SIRONA Inc. - CEO & Director

* John Sweeney

DENTSPLY SIRONA Inc. - VP of IR

* Nicholas William Alexos

DENTSPLY SIRONA Inc. - Executive VP & CFO

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Conference Call Participants

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* Brandon Couillard

Jefferies LLC, Research Division - Equity Analyst

* Elizabeth Hammell Anderson

Evercore ISI Institutional Equities, Research Division - Associate

* Erin Elizabeth Wilson Wright

Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst

* Jeffrey D. Johnson

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* John Charles Kreger

William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst

* Jonathan David Block

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Kevin Caliendo

UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution

* Michael Aaron Cherny

BofA Merrill Lynch, Research Division - Director

* Nathan Allen Rich

Goldman Sachs Group Inc., Research Division - Research Analyst

* Stephen Christopher Beuchaw

Wolfe Research, LLC - Director of Equity Research

* Steven James Valiquette

Barclays Bank PLC, Research Division - Research Analyst

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Dentsply Sirona Q2 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded for replay purposes.

It is now my pleasure to hand the conference over to Mr. John Sweeney. Sir, you may begin.

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John Sweeney, DENTSPLY SIRONA Inc. - VP of IR [2]

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Thank you and good morning, everyone. Welcome to our second quarter 2019 earnings conference call. I'd like to remind you that an earnings press release and slide presentation related to this call are available on our website at www.dentsplysirona.com.

Before we begin, please take a moment to read the forward-looking statements in our earnings press release. And during today's conference call, we'll make certain predictive statements that reflect our current views about our future performance and financial results. We base these statements on certain assumptions and expectations of future events that are subject to risks and uncertainties. And our most recent Form 10-K lists some of these most important risk factors that could cause actual results to differ from our predictions.

Now with that, I'll turn the program over to Don Casey, Chief Executive Officer, Dentsply Sirona.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [3]

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Thanks, John, and thank you for joining us on our earnings call. Overall, we were pleased with the second quarter performance, and we remain focused on delivering the core elements of our restructuring plan that include growth, margin improvement and organization simplification.

Second quarter internal growth reached 3%, in line with the target we outlined last November. We feel good about our strong new product lineup, which we expect to deliver sales growth in the back half of the year. Our new simplified structure is improving our efficiency and has enabled us to make significant progress against our headcount goals. To date, we've reduced FTEs by approximately 1,000 heads, giving us the flexibility to be more selective with new hires to drive key growth and strategic initiatives.

Second quarter gross margin was 58.2%, up 130 basis points compared to prior year. Operating discipline has contributed to an almost 300 basis point improvement in our adjusted operating income margin levels, which came in at 20.2% for the quarter. Our second quarter OI margin level bears testament to the progress we have made in executing our restructuring.

Our results clearly demonstrate that sales growth with disciplined spending management creates significant operating leverage, which drove an adjusted EPS of $0.66, up 10% compared to prior year.

Operating cash flow was strong at $145 million, up $28 million as compared to prior year. So overall, it was a solid quarter.

And I will now hand it over to Nick, who will review our financials.

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [4]

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Thank you, Don. Looking at Slide 8, our Consumables segment accounted for 44% of our revenue for the second quarter and represents a diverse portfolio of products that are sold globally.

In the second quarter, Consumable revenues, ex precious metals, were $442 million, down 7.8% as compared to prior year and down 4.1% on an internal growth basis. This performance was clearly below our long-term growth expectation for the Consumable business of 2% to 3%.

Let me highlight key issues that drove the decline. Our Consumable business tends to be very steady on an annual basis, but we have seen variation by geographic markets in the quarter-to-quarter results.

As we've analyzed this, we saw trade programs that impacted retail versus wholesale sales. To address this, we have now put in place a more disciplined approach and will focus on driving retail consumption, leading to a net reduction in wholesale-oriented promotion activities. Consequently, we'll have a flattening of our sales over a few quarters.

We're maintaining very positive outlook on the consumables market and continue to believe that our growth will be 2% to 3% next year. I would also note that we have a strong new product lineup in the back half of this year that will help to bring our performance back towards a normal run rate.

Consumable margins of 27.6% declined 240 basis points as compared to prior year. The reduction in the consumable operating income margin was due to low volumes and an unfavorable foreign exchange, which together more than offset our cost control initiatives.

On Slide 9, we highlight our Technology & Equipment segment, which accounted for 56% of revenue. Second quarter T&E revenues were $558 million, up 0.6% versus prior year, but a healthy 9.3% on an internal growth basis, driven by the success of our focused innovation initiatives.

All of our T&E product categories: equipment instruments, digital, implants and health care showed positive results year-over-year during the quarter. Our strongest growth came from digital products, which continues to benefit from the successful launch of our Primescan CAD/CAM digital impression scanning system. Our Wellspect business saw continued growth up mid-single digits, and implants continued to [see] positive performance, up 2% in the quarter.

Technology & Equipment operating income margins were 17.2%, up 480 basis points as compared to the prior year quarter, on higher volume driven by the successful launch of Primescan and our ongoing cost-reduction and portfolio-shaping initiatives.

On Slide 10, we look at our business performance on a regional basis. U.S. revenues were $328 million, down 3.3% compared to the prior year and down 1.5% on an internal sales growth basis. We experienced mid-single-digit growth in our Technology & Equipment segment, driven by strong CAD/CAM sales and the impact of our prior year dealer inventory destocking. Consumable sales declined as compared to prior year.

European revenues were $415 million, down 1% compared to prior year, and up 7.1% on an internal basis. Europe T&E internal revenues increased double digits, boosted by the IDS event, offset by a slight decline in consumable sales.

Rest of world revenues were $257 million down 6.9% compared to prior year, but up 2.4% on an internal basis.

T&E growth was not as high as the other regions, as we are not yet shipping Primescan to some of these countries.

As a result, we are seeing customers slow their purchases of Omnicam, in anticipation of the new technology. We expect to start shipping Primescan to these markets later in 2019.

Consumable revenues were flattish in the Rest of the World.

We have our consolidated non-GAAP P&L on Slide 11. Revenues, excluding precious metals, were $1 billion, down 3.3% but up 3% on an internal growth basis, driven by strong sales in Technology & Equipment.

Gross profit was $582.1 million or 58.2%, up 130 basis points as compared to the prior year. The gross profit improvement was driven by our cost containment initiatives and a more favorable exchange environment.

Total operating expenses were $380.3 million or down 6.9% as compared to prior year. As a percent of sales, SG&A was 38%, down 150 basis points as compared to prior year. Our cost containment initiatives, including our headcount reduction and portfolio-shaping initiatives, reduced SG&A as a percent of sales by over 325 basis points.

As Don noted earlier, we have already reduced our headcount by approximately 1,000 FTEs. The spending and headcount discipline is anticipated to be a key driver of our income growth going forward.

In the second quarter, there was a year-over-year increase in company-wide performance-based compensation expense of $27 million, which was allocated to the segments and impacted their margins.

This is a function of a comparison of 2018 where the challenging business results led to very low incentive compensation being paid. Further, this challenging performance in 2018 also resulted in a reduction in the long-term incentive program expense tied to 3-year performance goals.

The fact that we were able to absorb these compensation expenses, while delivering significantly improved margins, demonstrates our commitment to our cost improvement programs and our operating margin target.

These factors get us to an operating income of $201.8 million and an operating margin of [20.2%]. The tax rate for the quarter was 25.3%, reflecting our updated full year view of 24.75% and a year-to-date catch up.

The increase in the tax rate is due to the impact from the change in expected earnings mix, with more earnings in higher tax jurisdictions.

Second quarter adjusted EPS was $0.66, up almost 10% compared to $0.60 in the prior quarter.

Slide 12 shows cash flow from operating activities for the second quarter of 2019 was $145.1 million, up 24.1% versus prior year. Free cash flow, that is cash flow from operations plus capital expenditures, was $115.5 million in the second quarter of 2019, up 61.5% versus a year ago.

Capital expenditures in the second quarter were $29.6 million, down $15.8 million versus prior year.

Turning to second quarter. We utilized our strong cash flow to buy back 60 million of shares repurchased under our outstanding authorization program. This share repurchase highlights the confidence we have in our business and in our belief that Dentsply Sirona represents a good investment at current price levels.

In addition today, we're announcing that we are increasing our quarterly dividend from $0.0875 to $0.10. The 14% increase in our quarterly dividend underscores our belief in the stability and long-term cash generation capabilities of the company. Together with our buyback program, this move highlights our commitment to return cash flow to our shareholders.

Finally, as this is my last quarterly call with Dentsply Sirona, I wanted to thank our investors and our analysts for their insights, and my full team across the globe for their commitment and passion to the business.

I also want to thank Don for his vision and insights regarding all the changes we have made. This is a company with exceptional strengths and prospects. I look forward to working with my successor, Jorge Gomez, during the transition and in tracking the performance of the company as a continued shareholder.

With that, I'll now turn the call back over to Don.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [5]

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Thanks, Nick. Let me first cover off an important executive appointment. We recently announced Jorge Gomez will assume the role of Executive Vice President and CFO of Dentsply Sirona, effective in late August. His role will include finance, treasury, tax, Investor Relations, information technology and the office of business transformation.

With Jorge, we bring a talented global executive with an in-depth knowledge of the health care industry. I believe he brings the right mix of skills and experience as well as a solid track record of successfully managing global financial operations.

Prior to joining Dentsply Sirona, Jorge was CFO with Cardinal Health. Before that, he had many other roles with increasing responsibilities within that organization. He also has experience at General Motors and Smurfit Kappa Group. Having worked with Jorge for several years, I'm excited to bring his unique blend of commitment, business judgment and passion for people to Dentsply Sirona.

Moving to Slide 15, I would like to provide a brief update on the progress we are making against our restructuring goals. That restructuring was built around 3 core tenets, as we've said: revenue growth, improving margins and simplifying the organization.

Slide 16 provides a detailed update on the major components of that restructure.

We've been operating on our new product groups as well as our streamlined regional commercial structure for close to 6 months.

As the organization had over 100 years of history in the old structure, this represents a major change.

We have consolidated supply chain and brought in world-class talent to help us create a single structure to manage manufacturing, logistics, planning and procurement.

This group is off to a fast start, and this is a key reason why gross margin improved 130 basis points as compared to prior year in the second quarter.

We rolled out a comprehensive sales force effectiveness program in the U.S. under the direction of new leadership that we recruited from the outside. It will still be a few months before we are able to really look at progress against KPIs that we've set out for this group. But to date, we are comfortable with the progress that has been made and the results that we're seeing. We will be rolling that SFE program out to other major RCOs over the next 12 months.

Further, we have taken a much more disciplined portfolio approach to R&D, which has helped us this year, and we believe will impact the business going forward.

Based on these activities, we have a stronger portfolio today, and we've seen a real uptick in our new product activity, with items like Primescan, SureFil one, TruNatomy, and other new products leading the way. We've also seen progress around our portfolio-shaping activities that included the divestiture or closing of 4 business subunits.

Turning to Slide 17. You will see that we've made progress against our expense management programs as well as headcount. At this point, our headcount reductions have moved faster than planned. We are now entering the phase where we are selectively going to add heads back to critical growth initiatives, but will do so in a very disciplined fashion, with our target of 15,000 to 15,300 by mid-2020 in mind.

On Slide 18, we reiterate our long-term financial targets for Dentsply Sirona. 8 months into our restructuring, our confidence in delivering these goals has increased. And we believe that we are firmly on track to deliver revenue growth of 3% to 4%, an EBIT margin of 20% by 2020 and 22% by 2022 and double-digit EPS growth going forward.

Now on Slide 19, let me cover off our guidance for the full year 2019.

As you saw in our press release, we are raising our adjusted EPS guidance for 2019 by a $0.05 to a range of $2.35 to $2.45. The changes in the model include, first, we are raising the operating margin guidance from 17% to 18% to 18% to 19% for the year.

This is driven by efficiency in our gross profit and SG&A lines. Second, as Nick noted, the tax rate for 2019 is now expected to be 24.75%, up 75 basis points as compared to our previous guidance.

And finally, we are reiterating our guidance revenue range of $3.95 billion to $4.05 billion and our internal growth rate target of 4% to 5%.

One additional point that I would like to highlight is the impact our performance-based compensation as compared to prior year. As you all know, 2018 was a difficult year for the company. And as a result, a very low level of incentive compensation was earned. In 2019, there's been an improvement in terms of expected revenue growth, margin expansion and EPS growth. This will result in an increase this year in incentive compensation expenses to a more normal historical level.

Further, we are now accruing against a specific performance incentive program tied to achieving progress against critical KPIs that were outlined as part of the restructuring plan.

These incentive compensation programs were incorporated in our budgeting process and are designed to impact a broad cross-section of employees and create alignment across the entire company.

As a result of our performance, we have an annualized delta of $60 million in compensation expense year-over-year, $27 million of which was accrued in the second quarter.

Despite this, we expect to expand margins by approximately 300 basis points and increase EPS 14% to 19% in 2019.

With respect to the remaining quarters, we expect strong growth in our T&E segment revenues and improved growth in our Consumables segment.

I would also note that DS World will be a fourth quarter event this year, while it occurred in the third quarter of 2018. This results in a shift of revenues from the third into the fourth quarter 2019. As a result, we expect that the third quarter revenues will be up low single digits on an internal growth basis.

For the third quarter, we anticipate SG&A to be flat to slightly down from Q2 levels.

Looking at our operating margin, in the first half of the year, we had OI margins of 15.6% in the first quarter and 20.2% in the second quarter.

As a result of the DS World change and the timing of spending, we anticipate third quarter margins to resemble the first quarter of 2019, with stronger margin performance in the fourth quarter.

Net interest and other expense was $3.9 million in Q2, and we expect a similar run rate in the third and fourth quarters.

To close, it was a solid quarter, for which I would like to thank the entire Dentsply Sirona team. We have really shown tremendous commitment to delivering for our patients, customers and employee and our shareholders. The company has demonstrated over the last few quarters that real innovation and disciplined execution can deliver improved results. And while we are happy with what we've achieved, we recognize there's still a very long way to go.

We had said that progress will not be in a straight line, and that we are managing a lot of change within the company. But we do look forward to continuing to update you on our progress.

As mentioned, this marks the final earnings call for Nick Alexos. It has been a real pleasure working with Nick the past 18 months. He displays an unmatched commitment to the business and team and his peers. He certainly has played a key role in making Dentsply Sirona a better company today than when he took over the role. We are grateful for his work and wish him well in his future endeavors.

And with that, I'll open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Elizabeth Anderson with Evercore.

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Elizabeth Hammell Anderson, Evercore ISI Institutional Equities, Research Division - Associate [2]

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It would be helpful to get a little bit of color behind what you were talking about the channel inflows and outflows in the Consumables channel in the quarter.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [3]

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Sure. Thanks, Elizabeth. Thanks for the question and thanks for joining us today. Why don't I just take a big step back and kind of walk through our thinking on Consumables, and then deal specifically with the channel inflows and outflows. Obviously, we're not comfortable and happy with where we are in consumables. And when you look at the numbers we saw in the first quarter, second quarter, you kind of step back and ask yourself a couple questions. I mean, the first is, do we think the market is fundamentally changed on a global basis? And we see a lot of retail trends that -- and talking to dentists and looking at patient count, we don't feel there's been a fundamental shift in the marketplace.

But our analysis really showed us 2 things. I mean the first is if you look at our innovation track record over the last 18 months, particularly in the Consumables segment, you'll see that -- and we did not have a whole lot of big innovation. And I think when you're in categories like our preventive and resto business, our endo business without innovation, you don't see the sales force excitement. You don't see the opportunities to grow.

And the second thing, Elizabeth, that we saw is a lot of the movement -- we think consumables are pretty steady, but there's a fair amount of movement, as Nick mentioned, quarter-to-quarter. If you go back to Q4 2017, we saw a very aggressive program that resulted in inventory [load]. And we worked that off in Q2. You saw things like Venlo, where we had a difficult time shipping things in Q3 and that shifted things into Q4. And our dealer partners were questioning how reliable we were going to be in shipment. So you saw a different kind of order patterns. I mean, literally a year ago, our lab business, not a business we talk a great deal about, we saw some very aggressive activity and we're not seeing that anniversary, because we're now starting to take what we believe is a much more disciplined approach to how we are looking at our promotional dollars.

And for that, we want to really focus on things that are going to deliver sustainable retail progress versus focus on wholesale. So we're working with our dealer partners to say, how do we incentivize your reps to really focus at the dentist level? We talk to our sales force and we talk about our marketing programs, all -- how do we reorient those to really focus on the retail level versus the wholesale level? And when you do that, there's going to be a little bit of flattening quarter-to-quarter.

And ultimately, what we believe is -- as we get into the back half of the year, 2 things will occur. First, we will have kind of normalized the wholesale/retail pattern and more importantly for us, we think we've got a terrific back half lineup of new products. I mean whether it's TruNatomy in our endo business, we're very excited about SureFil one. We have a digital venture that will come out in our lab business, which we think will give that business a real shot in the arm.

And so we look at as we get through the back half of the year, and as we look 2020 and beyond, we really believe that a more focused, disciplined approach to how we promote and more importantly, how we innovate and really drive innovation across the more consumable business in that particular segment, we get excited about the growth opportunities and we think it'll return to a much more normal level.

So what you're seeing right now is what we believe is a slight shift in our promotional philosophy that we are working with our dealers hand-in-hand. That's going to result in a little bit of a flattening as we really look to equalize our retail shipments and our wholesale shipments.

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Elizabeth Hammell Anderson, Evercore ISI Institutional Equities, Research Division - Associate [4]

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Perfect. That's really helpful. And then as we think about -- you, obviously, had a nice uptick in the gross margin line year-over-year. As you think about the pacing throughout the rest of the year on that line, is there anything you think you would particularly call out that we should be aware of?

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [5]

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Elizabeth, it's Nick speaking. Nothing particular. We expect our gross margins to be relatively stable versus the Q2 level that you're seeing going into the rest of the year.

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Operator [6]

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And our next question will come from the line of John Kreger with William Blair.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [7]

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It sounds like your dental implant business is doing a little bit better. I think you said 2%. Can you talk about how that has trended over the last year? Is it in fact better? And what's driving it?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [8]

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John, thanks for the question. Implants -- a couple things on our implant business. We made a pretty significant shift from a leadership perspective. We brought in one of our real strong veterans, a guy by the name of [Gene Thorpe], and we're really starting to operate our implant business as a group. Before, we had 4 very significant brands and they were each kind of pursuing their own strategy. So basically by beginning to consolidate that, beginning to look at manufacturing efficiencies, more importantly, R&D and mapping out where we need to go from an innovation perspective, and really taking a more focused approach in terms of how we look at each of the brands and promote those brands. We feel that we're starting to get traction in the marketplace.

I would tell you, we want to get that business and what we think we have a clear path to over the next year or 2, is how do we get that business, which is positive and has been positive for the past couple of quarters. We really want that business growing at that -- at least category levels. And we believe the brands, the R&D portfolio that we're starting to put together and a more disciplined approach to blocking and tackling, gives us an opportunity to potentially start gaining shares as we go out.

But credit to that team. They've really taken something that -- we've seen several consecutive quarters of decline year-on-year to the point where we feel that we're starting to see some positive growth. We still have an opportunity to expand that growth aspirations to at least achieve what the category has done.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [9]

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Great. And then one quick follow-up. How are your specialty businesses doing versus your more kind of GP-oriented businesses? Are they -- are you seeing similar trends there? Or is one doing better than the other?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [10]

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Well, obviously, the thing we're most excited about in our -- from a growth opportunity, John, is our ortho business. We're -- we feel very good that we've spent a lot of time getting SureSmile to the point where we're starting to gain traction where we have an opportunity to expand that overseas out of what's principally a U.S. program today.

So we're excited about that. We're starting to see good traction there.

On our endo business, we're kind of hold and serve. I think one of the things we're excited about the fourth quarter is TruNatomy, which is really, in our mind, an opportunity to have a very good conversation with the endodontist community -- it's a very important specialist community to us -- about the role of having a less invasive procedure where you're really preserving dentin, and that's what TruNatomy does.

So that's kind of a little bit of a different thought process in that, and it gives us an opportunity to really shine because we believe new products' clinical education is what we do well.

And so specialty business is really important to us. We feel that implants and ortho really, really moving the right way. We think endo's hold and serve, but we, in our mind, once we get some new product momentum, which is coming in the fourth quarter, that we're very, very focused on getting that business moving faster than it is today.

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [11]

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And John, just -- you may know this, but just to clarify. Both ortho and implants are under our T&E segment as they relate to some of our digital technologies. The other is, as Don mentioned, are in the Consumables segment.

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Operator [12]

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And our next question will come from the line of Tycho Peterson with JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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Don, I want to go back to Consumables for a minute. I appreciate the color you provided before. But as we think about what you laid out, how much of the recovery is dependent on the trading program ending and maybe shifting your go-to-market strategy versus innovation, SureFil, TruNatomy and some of these things you highlighted coming out of IDS?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [14]

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Look, Tycho, I think the alignment of retail and wholesale is -- that's finished in the back half of this year. And after that, it really becomes, in my opinion, an innovation story.

I would also tell you, having spent a fair amount of time in the field, which has been really terrific in the last couple of months, I'm optimistic that if we really focus on retail programs and get the dealer reps excited, get our reps excited, we've kind of revamped our U.S. leadership team and we're -- I think we're ramping up the effectiveness of our marketing program. I feel good that that's going to be a step in the right direction. And I tend to think that's a first 3 quarters of this year event.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

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Okay. And then maybe one for Nick on margins. You're going to exit this year at 20%. Obviously, your guidance is for 20% next year as well. So how do we think about that dynamic? Is there a reinvestment cycle we have to think about next year? Or is there something that could dampen additional margin recovery?

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [16]

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I would say, Tycho, we didn't say we would exit this year at 20%. Obviously, we had a good quarter. Right now our target has been revised to 18% to 19% versus the previous guidance of 17% to 18%, given the realization of some of the cost savings earlier. We do expect to make strategic investments that will get us into that guidance range through the end of the year. And clearly with our targeted cost savings building into next year, we feel we have very good momentum to get to that end of year 20% next year. There's no change to our view on guidance for 2020. But clearly, we feel better given where we are year-to-date for the rest of the year.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [17]

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And then maybe one last one for Don. Just can you comment on SureSmile? I know it's early days, but just curious what traction has been like in the field.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [18]

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Yes, Tycho, I would say, first, we're pretty excited that we're actually able to get our GP software up and launched. And that's been an important event for us.

I think we're getting -- what we're finding is that we're getting trial at the ortho level. They want to understand whether the system and obviously, root to crown is a little bit different than some of the competitors. They want to understand that. So we're getting trial there. We're getting good traction with the GPs, where they're not necessarily set with a specific system. So with ortho, it's kind of how many clear aligner programs do they want to be running in their office? Do they stay focused on one? Do we offer multiples? With the GPs, it's not set. So we're getting a little bit more traction there. The opportunity we're also seeing in SureSmile, Tycho, as you probably know, we tend to be North American focused right now. And we're looking forward to expanding that beyond the North American area right now. So that started into Europe, and we're optimistic we're going to start seeing approvals in Asia in the not-too-distant future.

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Operator [19]

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And our next question will come from the line of Jeff Johnson with Baird.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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Don, maybe I'll start with a Primescan question. Just can you talk about kind of product availability, when do you think you might be able to service an upgrade program? Obviously, you have a very big installed base of CEREC users, both in the U.S. and globally. So that could be a nice catalyst for later this year. Does that go into next year? And maybe is Primescan at all shifting the DI versus CEREC conversation? How are the DI sales going with regards -- or relative to full CEREC system sales?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [21]

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Thanks, Jeff. Right now it's going to take us to the fourth quarter to fully be able to meet demand for Primescan. Look, we're very happy with demand for Primescan so far. And again, credit to our manufacturing team. They were able to get some stuff out in Q1.

But demand has exceeded our ability to manufacture. And we -- we expect that to ease as we get into the fall. Again, demand has been good, so I can't give you an exact -- this is exactly where we're going to be able to service all the demand. Based on that, and I know you're aware of this, we have not, at this point, offered an upgrade program. As we head into DS World, which is in October this year, we're really trying to understand what base demand is and what is our manufacturing before we're really going to consider whether we think an upgrade program is something that we want to do.

So look, ultimately, we understand that we've got a large installed base. That base, by the way, has been -- really excited about it. But until we really know exactly where we are from a manufacturing perspective, we're reluctant to go out and come in open ended that there's going to be an upgrade program.

That being said, we -- I would say right now we've been very gratified that we are selling full systems. The focus of the sales force is being out and selling full systems. But I'll also tell you the thing that has surprised us from a little bit of an upside perspective, has been the performance in the DI space. Because there was -- when we launched the product, there was -- we had been chairside, chairside, chairside. We hadn't had a lot of experience of really driving the DI space. And we've seen the results there.

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Jeffrey D. Johnson, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [22]

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Okay. That's helpful. And then I meant to lead off, Nick, just wishing you best of luck. I've enjoyed working with you.

So maybe a question for you or Don. On the Consumables side, Don, as I heard kind of your discussion of where Consumables go and in some of the wholesale issues maybe in the near term here, one thing I didn't hear you really address is just kind of some of the pricing and bundling things we're starting to hear some -- out of more of the competitors. And I look at now that you guys have rearranged revenue segments a couple of quarters ago, that 27% operating margin in Consumables seems like it's probably a good 10 points higher than some of your closest competitors on like-for-like products. So how are you feeling about pricing on the Consumables side of the business? Do you think that can stay positive going forward? Do you feel like you have to bundle or do any other initiatives, just given some of the pressures we're seeing from bigger DSOs and other kind of buying groups, things like that?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [23]

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Yes. Thanks, Jeff. We've been -- we feel pretty good about price in the Consumables segment. We -- as we looked at that Q2, we've been able to hold price. I believe -- and I don't mean to beat a dead horse here, but we've got to be that innovation. And one of the things, when we talk about TruNatomy, when we talk about SureFil one, we talk about this digital vendor -- digital venture program that we're pushing out the lab space. It's all designed, in our minds, to really represent a significant innovation. And with innovation, we're going to look to get price.

So in terms of bundling, in my mind, I don't view bundling defensively at this point and as a way of protecting the Consumable business. I do think, as the big shift moves forward, the opportunity we have is really working with the dentist to provide complete solutions. And whether that's using our digital equipment, whether that's CBCT and a DI program to really facilitate better procedure outcomes and faster procedure outcomes. And we believe that if we can really get our diagnostic program working better with either the specialty products or the Consumable products in a way that it helps the dentists practice better, we think that's how we win.

So whether that's -- I don't view that as a practical bundling situation as much as the reason we put the company together, is to become much more of a procedures solutions company than an individual feature and benefit consumable product company. So look, there's an opportunity to bundle things, and we will when appropriate. But in my mind, it's less about defense than offense and it's much more about helping dentists do better procedures.

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Operator [24]

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And our next question will come from the line of Jon Block with Stifel.

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Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [25]

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Donald, [someone might have asked] you had solid Europe T&E sales, but you also had some IDS sort of shopping versus buying comments that you called out last quarter. So maybe you can -- if you can talk about your thoughts on the IDS follow-through that Dentsply Sirona saw. Was it Primescan-specific? Was it more broad based? And do you believe it does have a tail into the third quarter results? And then I've got a follow-up.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [26]

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Okay. Good, Jon, and then -- we'll take the follow-on, obviously. IDS is interesting. And first, we did see a good, solid T&E event. And particularly what we're seeing, in our DACH region, which is Germany, Austria, Switzerland, we saw good, positive IDS results.

What -- it's hard to measure, and what we were trying to figure out is how much purchasing is going to go on from beyond the DACH region. Because with 160,000 dentists, literally, it's become a very global event where we get to see purchases. So 2 things that I think we learned this IDS is that the world comes to shop at IDS, the DACH dentists come to buy.

Now the interesting impact for us that's kind of been a positive, but it's also had an offset, is that particularly out of Asia, they all saw Primescan and they all were very excited about Primescan. When can we have Primescan? And the problem with when can they have Primescan, we didn't have it approved. We just got Prime approved in Japan recently. And so as a result, we saw less T&E in Rest of World than we might have if they hadn't been shopping and seen IDS.

So I view IDS, and the word we used is shopping. And we had great traffic, we had great results, very positive feedback from all the dentists that attended the event. But they go back to Japan and want to purchase Primescan and Primescan wasn't there. And as a result, we didn't sell as much Omni as we may have thought we were going to because we saw the dip in anticipation of when Prime was going to come out.

So again, I think IDS showed that it's a very good event for us in Central Europe. We have to be thoughtful about how we forecast that business 2 years from now. But we're -- look, we think we had a great IDS just in terms of we were able to expose dentists to SureFil, we were able to expose them to stuff like TruNatomy preemptively. So it was, in my mind, kind of like a global launch. And that saves us a lot of time from a global launch perspective. When those sales show up, it's going to be more a function of when approvals are by region than specifically tied to the IDS event.

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Jonathan David Block, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [27]

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Got it. Very helpful. And the second question, more of a clarification. So for Consumables, I think you called out 3Q will be better than 2Q. But just to be clear, you expect consumables to return to growth in the third quarter. And then Nick, is there sort of a collective or cumulative FX headwind that you're seeing in '19 relative to the initial guidance you gave 6-plus months ago?

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [28]

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Yes. Just quickly on the FX, there is FX guidance, it's a little bit more than what we gave on last call. Year-over-year, it's about $100 million. I think given the strength of the U.S. dollar literally day-to-day and some of the continued weakness in the U.K. on sterling, that might be $10 million or $20 million more versus that $100 million year-over-year headwind. I think the general comment on the Consumables is we expect strengthening to the back end of the year, getting to a positive number, and certainly building momentum into next year.

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Operator [29]

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And our next question will come from the line of Steven Valiquette with Barclays.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [30]

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And also let me wish Nick the best of luck going forward in his career.

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [31]

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Thanks.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [32]

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My question here is just tying a few things together. This whole notion around the Primescan demand outstripping supply in mid-2019, which is a high-class problem to have. You mentioned in your remarks this notion of the stronger demand for Primescan leading to diminished demand orders of Omnicam. But doesn't seem to really have any negative impact on the 2Q sales results on the net basis. I guess really the question is, and tying into that last question, thinking about the -- just regionally, are we seeing that you're able to meet the demand for Primescan maybe in North America? But maybe in other regions, there's more of a -- kind of a delta between the supply and demand? Maybe just talk regionally about the supply/demand delta on Primescan.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [33]

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Yes. Thanks, Steve. Look, right now North America is the principal area where we're trying -- we're playing catch-up to supply and demand. We feel that we've done a pretty good job on meeting demand in Europe. We recently got approvals in Asia Pacific. And when -- once we have approval, we have to decide when we're going to launch. But it's -- the principal disparity right now has been a U.S.-based issue.

And we're making progress. I mean, it's not that customers are waiting months. People who are placing orders are getting those orders serviced. And the time to -- between order and when we're able to actually deliver is getting shorter and shorter. But we really haven't turned the sales force loose yet in terms of, hey, let's go out and really beat the drums. Because we want to be careful that somebody takes an order and we wouldn't be able to deliver for 3 months. So we're getting better at it.

And again, I can't give you the exact day or the week, but we feel good, by fourth quarter on a global basis, we should be able to meet demand for what we anticipate. But it's still -- that day is a little -- it's still in the future.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [34]

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Okay, and then just a quick theoretical question, just to throw it out there, on the softer Consumables. Just curious, from an industry perspective, are you seeing maybe any phenomenon that consumer-directed clear aligners, which are seeing incredibly high volume gains across the industry, is that perhaps just leading to softer both GP and orthodontic patient visits overall? And maybe that's playing a role in softer Consumables? Or do you think that's just off-base as far as that theory? Just curious to get your thoughts around that.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [35]

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That's an interesting question, Steve. I mean, I -- obviously, we're watching the Consumable business pretty closely. And look, we think the underlying retail patterns are not robust, but they're really not in a state of decline. So it could be something that impacts it. But again, if we were to draw a straight line on what we think retail and the principal Consumable preventive resto areas over the last 18 months, 24 months, we feel that demand is pretty steady. It's not -- by the way, it's not 4% to 5%. We tend to think it's 1% to 2%. And maybe in the last 2 quarters, it's been kind of a 0% to 1.5%. But whether that's a function of people spending their money on more esthetic than functional dentistry, that could be a factor. It's not one that we've really looked at.

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [36]

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Kind of ironic to think you're going to put a clear aligner on bad teeth.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [37]

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Yes, I get that. I was all just theoretical anyways, just throwing it out there. But I appreciate the color.

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Operator [38]

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Our next question will come from the line of Michael Cherny with Bank of America Merrill Lynch.

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Michael Aaron Cherny, BofA Merrill Lynch, Research Division - Director [39]

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Just circling back on the Consumable side and thinking about that transition with the wholesale/retail side. Is there any cost associated with it? And as you think about that transition versus other companies that may have gone through certain dynamics in the past, what are the mileposts you're looking for to feel confident that this is more temporal in nature and will pass over time?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [40]

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From a -- thanks, Michael, for the question. From a cost basis, no there's not a cost associated with that. We'd like to think that we're just going to get more bang for the buck for the marketing and the programs. So I don't see that being a cost. And then the milestones that we want to see is, look, if we think retail is growing at 2% and we think we're holding share, we think our wholesale should look a lot like that. And that's the key milepost that we're really looking at.

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Michael Aaron Cherny, BofA Merrill Lynch, Research Division - Director [41]

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And is this -- have any potential or desire or interest to go more direct? Or is that something that's not really in the planning right now?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [42]

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No, it's interesting. On the consumables side, we go through -- we have 25 listed dealers. We think they do a pretty good job for us. There's a advantage to a dealer in terms of the dentist likes the ability to sit and talk to a dealer, and we look forward to continuing working with them. But we right now feel dentists have great access to our Consumable products.

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Michael Aaron Cherny, BofA Merrill Lynch, Research Division - Director [43]

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And then just one more quick one. I know this dynamic clearly impacted Consumables in the quarter, as you've discussed. I think there's also some dynamics, as you mentioned, about the comps component. As you think going forward, if you were to normalize for this, how do you feel the consumables are trending relative to all the comp-adjusted factors that could be put in play?

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [44]

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I would say overall, we're trending below where we should be. But I think some of the things that we're putting in place, particularly this shift in the promotions that we've talked about, and the new products, will get us back to that positive level and where we think kind of the market is going into 2020.

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Michael Aaron Cherny, BofA Merrill Lynch, Research Division - Director [45]

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Good luck, Nick.

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [46]

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Thank you.

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Operator [47]

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And our next question will come from the line of Erin Wright with Crédit Suisse.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [48]

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You mentioned that innovation story several times, and I'm just curious, kind of excluding some of the dealer and channel dynamics, if some of those new product launches on the Consumables side actually did help some underlying trend excluding some of those external factors. And just more broadly, I guess, how should we think about the longer-term annual contribution from some of these new product launches in Consumables? Could it be enough to add a percentage point or 2 to Consumables growth on an annual basis? How should we be thinking about that?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [49]

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Thanks for the question, Erin. Look, I think the Consumable products are -- tend to be a much more back half event. So I -- look, we were really limited in terms of how broad we went with SureFil. Digital -- the digital dentures comes in the fourth quarter. TruNatomy was more a Europe event in Q2. And it rolls out in the North American space really kind in the mid- to late third quarter. So we -- I don't think it was a big contributor to Q2 on an underlying basis. I think it will be a much bigger contributor as we go forward in the back half of the year.

I would tell you that, Erin, we believe that our new products should be able to be a point gainer or potentially higher in the Consumable business. I mean, I think if you look at the base Consumable business, our formula over time is we really think that we ought to be adding innovative products that can be margin- and growth-accretive. So -- and we've given you guys a outlook that we think that, that, for us, should be, over time, 2% plus. And we think innovation is the way we're going to get there.

So yes, I do think you have to measure -- you have to factor in what we think the new products are going to do year-on-year. And, look if you look at '18 -- if you look at 2018 new products versus 2017, there's not a lot going on there. If you look on the Consumables side 2019 versus 2018, it's going to be positive. And Consumables are not like a technology launch, where this is a big bowl, it's more of a build. So we're anxious to get those products out because we think it will excite the sales force, it gives us something to talk to the dentists about. We think they're really good products. So we -- as we look at 2020, we really feel that those will be contributors.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [50]

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Okay, great. And then on SureSmile, when do you think that will be more meaningful from a financial perspective? I know it's still early there. And then also, just there's varying different strategies in clear aligners, whether it's combination or ortho-focused or GP-focused or direct-to-consumer approaches out there. What do you think is the most meaningful opportunity for you? And how did you weigh kind of those opportunities for Dentsply, I guess, over the near and longer term?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [51]

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Sure. Look, we think SureSmile will become a bigger factor quarter on quarter on quarter. I mean, we think that's one of the bigger growth opportunities we have. Now remember, there's kind of a base ortho business there that's significantly larger than SureSmile, so what SureSmile does sometimes might be offset by what the base ortho business is doing.

In terms of where we are, I would tell you that the 3 base opportunities and how we're looking at SureSmile is actually right now ex U.S. We're really trying to focus on getting that up and running. That's one of the advantages of Dentsply Sirona, we have a global footprint. The second right now is we go up and push out Primescan, gives us a great opportunity to have a conversation with prospective Primescan customers as well as our base (inaudible) doctors as an opportunity to sell SureSmile. And the last issues right now within North America, we're seeing more traction on the GP side, particularly after we launched our GP software. But we're optimistic, given the capabilities and the product attributes of SureSmile, that it's going to be very relevant in the ortho space. The ortho space, it's a discussion about whether they want to replace a system or add a system, and that takes a little bit longer than a potential GP that doesn't have a system today.

So just in quick order, Erin, I think it's ex U.S., it's partnering Primescan, and then it's -- I think GPs will see more traction sooner than later. But we're optimistic long term. We think we got a great product for orthos.

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Operator [52]

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And our next question will come from the line of Nathan Rich with Goldman Sachs.

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Nathan Allen Rich, Goldman Sachs Group Inc., Research Division - Research Analyst [53]

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Don, on Consumables, is there any categories that you would call out in particular that drove the underperformance in the quarter? And then you mentioned the need to be more disciplined with promotional activities going forward. Could you maybe just talk about what that entails? And kind of how quickly some of these changes can be implemented as we think about the go-forward?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [54]

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Yes, maybe -- and we've kind of hinted at it. But our lab business was an underperformer in Q2 both in the U.S. and (inaudible) on a quarterly basis. It's a business we don't talk a heck of a lot about. But it's kind of our teeth, and there's some equipment business that goes there. And we were up against a tough comp in Q2, and that was based on some programs that had been done in the prior year that led to some significant orders that were not anniversaried.

And then in terms of the discipline approach, again, it's going to take a couple of quarters. And we saw some of that in Q2, we'll see some of it -- we saw some of it in Q1, some of it in Q2. And we think we come out of that in the back half of this year. And what it means is let's just really be focusing on programs that impact the dentist. And we're working with our dealers. It's like how do you incent the dealer rep? How do you incent our reps to really get excited about some of the new products that we're launching? And make sure that we're spending on there versus -- maybe look at a [quarter end] program where it might be a little bit more wholesale-oriented.

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Nathan Allen Rich, Goldman Sachs Group Inc., Research Division - Research Analyst [55]

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Okay. And just to clarify in terms of your expectations for the back half of the year. The magnitude of improvement just between 3Q and 4Q, just what your expectations are as we think over the next 2 quarters.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [56]

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And I thought we tried to spell that out in my section. So look, I would tell you we think Q3 is kind of -- if you look at the margins, we're holding them. We think that the biggest issue we're going to face Q3 and Q4 is last year, DS World was a big Q3 event, and it's going to be big Q4 event this year. And we look at the new products to be much more of a Q4 event than a Q3 event. So that's kind of how we laid it out. And in both in the prepared remarks, as well as other stuff. We feel that Q4 is obviously bigger than Q3. So...

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Nathan Allen Rich, Goldman Sachs Group Inc., Research Division - Research Analyst [57]

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Appreciate that. If I could just ask one quick follow-up on Primescan. How should we be thinking about kind of the size of the backlog at this point? And how are you managing kind of priorities for meeting demand as capacity ramps up, as we think about that geographic expansion and getting into some of these markets in Asia Pac, versus getting an upgrade program in place? Can you just kind of talk about your thought process there?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [58]

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Yes. And basically, the way to think about it, Nathan, is that it's -- right now, we're meeting demand, it's just how fast you meet demand. There's not a dentist that we're just saying, "You can't have a Primescan." It's like, "Okay, it's going to take us a little while to get there."

And then we're prioritizing, right now, being North America is the priority. I mean, we've got a significant opportunity here. I mean, we have a large installed base that has been very interested in buying the product. We still believe that chairside dentistry in 17%, 18% of the U.S. is really an area that we can continue pushing. So we'll really make sure that the U.S. is taken care of and then we'll move to other regions. But we're also focused on going to Japan. Let's get to some of the KOLs, let's get it to people who are really important to creating a broader story there. But it's North America right now.

And then this is not a gigantic backlog, it's just -- as we look at it, we get asked the question all the time, "Are -- look, are you guys going to an upgrade program?" And the question is, "When are you going to announce an upgrade program?" And we've been pretty consistent answering it, to say, "We really want to understand what our manufacturing capabilities are versus base demand. And until we really get comfortable with that, that's how we're going to manage where we think we are from an upgrade program."

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Operator [59]

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And our next question will come from the line of Brandon Couillard with Jefferies.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [60]

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Don, could you just touch on the imaging portfolio and whether that was a positive contributor to growth in T&E in the quarter? And then just how you're feeling about the pricing backdrop for the market overall.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [61]

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Yes. Imaging was positive. If you look at Q2, we were positive across everything in the T&E segment. Our -- we're anxious to get some of the products that we talked about at IDS approved in the U.S. We think that's a fourth quarter event.

And right now, the imaging business is we've seen a lot of price compression over the last 18, 24 months. We built that into our budget and our forecast and our guidance. So we're not seeing significant changes versus what expectations are. And then we'll tell them we got to innovate.

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Brandon Couillard, Jefferies LLC, Research Division - Equity Analyst [62]

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Follow-up for Nick. Do you still expect the operating cash flow to be up year-over-year in '19? And then do you do an updated figure for us on CapEx line for the year?

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [63]

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Yes, the CapEx, Brandon, will be per our guidance, $165 million to $175 million. We're managing that very tightly. And then in terms of cash flow, we definitely expect this to be a good cash flow year. Clearly as we've told the Street, we've got about $120 million of onetime restructuring cash that will go out this year. The majority of that will be in the second half. So that will be onetime in terms of charges. But from an operating cash flow standpoint, clearly, the operating income is going to be good year-over-year, and we're working on our working capital as well.

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Operator [64]

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Our next question will come from the line of Steve Beuchaw.

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Stephen Christopher Beuchaw, Wolfe Research, LLC - Director of Equity Research [65]

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Thank you, Nick, for all your help over the last couple of years. Certainly wish you all the best there.

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [66]

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Thanks, Steve. Appreciate it.

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Stephen Christopher Beuchaw, Wolfe Research, LLC - Director of Equity Research [67]

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As far as the -- or a question that -- a couple for Don and just one quick one for Nick. Don, I wonder if.

(technical difficulty)

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [68]

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Steve, you're breaking up. Like we're getting every third word. It's an early 70's horror movie.

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Stephen Christopher Beuchaw, Wolfe Research, LLC - Director of Equity Research [69]

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Well, I'm a fan of those, but will try to do better here on the connection. We'll -- trying again.

So I guess first for Don. I was hoping you could opine on a couple of things. One is, in your assumption for the back half, do you think there are any changes in terms of the end market outlook? You're one of few that hasn't spiked out Europe and Germany. You clearly had a really good quarter in Europe. But anything you see there?

Second, I was hoping you could give us just an update on how you're seeing sales force efficiency progress. You've made some significant changes to how the sales force operates, so just some perspective on how those changes are going would be really helpful.

And then one just quick one for you, Nick. I wonder if you could speak to the medium-term outlook for the tax rate. The guidance went up and you gave some very clear commentary as to why that happened. But some perspective on how things roll out in future years would be great.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [70]

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Sure, thanks, Steve. I'm always happy to opine, as my management team would attest. But look, end market particularly in Europe, we're actually -- we feel pretty good that underlying demands has been okay. The challenge for us, there's a couple of things going on. We saw a little bit of a spike in Q1 that didn't -- that had a ripple on Q2, which was Brexit. People were ordering anticipating that was going to happen when it didn't. And that was some inventory shifting around.

But underlying demand Europe, Rest of World, we feel pretty solid. And again, in our mind, it's -- we just to make sure we're aligning wholesale and retail shipments. And lab was a drag for us in Europe and Rest of World in Q2. We feel good that, that takes care of itself [comping] the back half of the year.

On SFE, a couple of things on SFE. First, we are operating in the U.S. We haven't rolled that -- we will roll SFE out to the other regions, Germany, China, Japan and other places over the course of the next 12 months. SFE, and we've talked a little bit about this before. First, we moved everyone to Salesforce. We did a long, real segmentation, and we've been focusing on what we believe are our higher-priority doctors. We had to train sales force to be fluent, and one of the things we're trying to do is be able to represent or have a conversation about all of DS products, even though you may be going into just sell endo, and that's going pretty well.

In my experience with doing big SFE programs, look, it takes 6 months before you're really measuring things reliably on KPIs. What we're seeing is the trendlines of reps who are in territories for a while, we're starting to see what we want to see. So we're pretty comfortable with the progress they're making to nonfinancial metrics. And from an underlying perspective, we're pretty comfortable with where we are financially. I do think in a quarter or 2, we'll be in a better position to really put some meat on the bones in terms of report out against some KPI for you guys to get some visibility on that.

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [71]

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And then quickly, Steve, on taxes. Obviously, the tax reform worked against us, given that we have a high percentage of our income coming out of Central Europe. I think the current target of 24.75% for the year reflects the balance of earnings as we expect them. And that's probably a pretty good benchmark, plus or minus 50 basis points, going into the future. But tax reform around the world is evolving, and I'm certainly not one that can predict that.

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Operator [72]

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Our next question will come from the line of Kevin Caliendo with UBS.

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [73]

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So just help me understand, what percentage of your Consumables is currently retail versus wholesale? And what do you expect it to be once this shift is over?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [74]

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Yes, Kevin, it's all -- a easier way to look at that is what's at the end market. So all of our sales are retail, it's just how do you -- yes. What -- and through dealers. So it's what are the dealers buying versus what are the dentists buying.

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [75]

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So what is the shift? Like, what are we talking about in terms of magnitude or shift of the percentage of your Consumable products that you think are going to go out of dealers and maybe direct to dentists?

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [76]

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Yes, Kevin, the dialogue that we commented on was that our promotional efforts are going to be more targeted towards driving end retail demand as opposed to working directly -- just directly with the wholesalers in terms of promotions. So it's really just redirecting marketing effort.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [77]

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Yes And a way to think of that, is all of our stuff will go through dealers to the dentists. I mean, we're not going direct. It's just basically we're trying to align -- if retail is growing at 3%, we want to see wholesale grow at 3%. We don't want to see wholesale grow 1 quarter at 9%, the next quarter down 4% when underlying retail demand is relatively stable.

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [78]

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Okay. I understand now. And is there -- is this a question of inventories? Or is it just a question of timing? It's just interesting that there is such a scattershot of that. Is it just a question of timing of...

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [79]

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Yes, and I would say the one thing you have to be mindful, we're talking about a couple of small percentage points up and down on our base of business. So it's not a lot of dollars in each of the markets for each of the products, it's really just a realignment of our wanting to have more direct market stimulated. So it's -- when you really look at it, it's really not big dollars moving around, particularly when you spread that around the world, right? It's really just more to the original strategy set out of trying to create more volume demand for our products even in the Consumables segment.

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [80]

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Where are you in terms of capacity on Primescan relative to your -- I mean, are you at 50% capacity right now? 75% capacity in the existing manufacturing facility for Primescan?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [81]

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I would say we're north of 75% and closing fast. And again, it's -- the discussion isn't we're saying nos, we're not selling it. We're just -- we're being measured in terms of when a dentist wants it right now, we want to be able to deliver it as quickly and reliably as we can. And right now, there's a little bit of a difference between when they purchase and when they get the product. And that's what we're working through right now. But -- and look, I would love -- look, I'd love to have more Primescan, particularly ex U.S., and that's what we're working through right now. But we're 75%, and it improves every day.

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [82]

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I understand the installed base is enormous on -- for Primescan to penetrate, but have you contemplated sort of doing what Align did with iTero and Invisalign, where they basically went and marketed directly to some large DSOs and were able to get big chunks of share doing that. Obviously now, you have the aligner to be able to offer. Is that a strategy you've contemplated? Is it available to you?

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [83]

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It's absolutely available to us. And it's -- we're not contemplating it, I mean, we're doing it. I mean, look, our relationship with the DSOs is really important. We've had some good success with Primescan. And in terms of some of the DSOs, we're out presenting it all the time. And one of the first questions we get asked is, "Do you have a clear aligner program that you can put together with this?" And the answer is yes.

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [84]

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What do you think drives the -- what would drive that sale? Would it be the aligner or -- itself? Or would it be the scanner? Meaning, like for the GP, what matters more?

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John Sweeney, DENTSPLY SIRONA Inc. - VP of IR [85]

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Kevin, we're about 8 minutes past the hour. We're going to have to limit to one question for the [period]. We'll get back to you offline.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [86]

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Kevin, we'll give you a call and we could run through some of this stuff.

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [87]

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No worries.

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Operator [88]

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Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. So now I'll hand the conference back over to Mr. John Sweeney for any closing comments or remarks.

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Donald M. Casey, DENTSPLY SIRONA Inc. - CEO & Director [89]

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Yes. I wanted to close before John did it.

And I mentioned in my prepared remarks that this is Nick's last call, but I do really -- and want to thank him for all the work. And we're in the middle of the call, and you guys know what these calls are. Nick has got his game face on right here. He's got papers all spread out. And he has been an absolute, unbelievably good partner to work with. And I -- on behalf of all Dentsply Sirona, Nick, thank you.

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Nicholas William Alexos, DENTSPLY SIRONA Inc. - Executive VP & CFO [90]

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Thanks, Don.

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John Sweeney, DENTSPLY SIRONA Inc. - VP of IR [91]

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Thanks to everyone -- for everybody for joining us. And we look forward to updating you as we move through the quarter and on our next quarterly earnings call. Have a good day.

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Operator [92]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.